Children are costly, but raising them may pay: The ... · PDF fileChildren are costly, but...

DEMOGRAPHIC RESEARCH

VOLUME 30, ARTICLE 8, PAGES 253-276

PUBLISHED 24 JANUARY 2014 http://www.demographic-research.org/Volumes/Vol30/8/

DOI: 10.4054/DemRes.2014.30.8

Research Article

Children are costly, but raising them may pay:

The economic approach to fertility

Martin Werding

This publication is part of the Special Collection on “Theoretical Foundations of the Analysis of Fertility”, organized by Guest Editors Johannes Huinink,

Jens Ehrhardt, and Martin Kohli.

© 2013 Martin Werding.

This open-access work is published under the terms of the Creative Commons

Attribution NonCommercial License 2.0 Germany, which permits use,

reproduction & distribution in any medium for non-commercial purposes,

provided the original author(s) and source are given credit.

See http:// creativecommons.org/licenses/by-nc/2.0/de/

Table of Contents

1 Introduction 254

2 The economists’ contribution to explaining fertility behaviour 255 2.1 Is there room for rational decision making? 256

2.2 Modelling options for analyzing fertility choices 258

2.3 How much of the social context can enter the analysis? 260

3 Milestones and recent developments 262

3.1 Fertility and intra-family bargaining 262 3.2 Fertility and labour force participation 264

3.3 Children as investment goods 265

4 Agenda for future research 267

5 Concluding remarks 269

6 Acknowledgments 270

References 271

Demographic Research: Volume 30, Article 8

Research Article

http://www.demographic-research.org 253

Children are costly, but raising them may pay:

The economic approach to fertility

Martin Werding1

Abstract

OBJECTIVE

This article provides a non-technical introduction to analyses of fertility which are

based on a rational-choice paradigm and which acknowledge that raising children may

have a strong impact on the well-being of parents that can be described in terms of costs

and benefits. It surveys different types of economic fertility models which can be used

to address a variety of research questions, and it also discusses some basic strengths and

weaknesses of applying economic analyses in this particular field.

RESULTS

Starting from a seminal contribution by Becker (1960) which may have been of little

use for applied research or for interdisciplinary work, the economic theory of fertility

has unfolded a differentiated research programme with indispensable contributions to

the broader field of fertility research. Important features are the inclusion of (i) different

bargaining positions and differing incentives of partners interacting in fertility choices;

(ii) simultaneous decisions regarding labour force participation (as well as education)

and fertility, and the role played by employers, labour market institutions, and other

public interventions; (iii) the idea that children (or their “human capital”) are

investment goods with various kinds of returns that may be dispersed over an extremely

long period of time, are subject to enormous uncertainties, and are strongly influenced

by the social context and, again, by public policies.

CONCLUSIONS

Economic aspects and elements of economic models should be included in any large-

scale attempt at understanding fertility behaviour through interdisciplinary research.

Improvements in the data infrastructure, which are only partly underway thus far, would

be an important pre-requisite.

1 Professor of Social Policy and Public Finance; Ifo Research Professor; Fellow of the CESifo Research Network. Address: Ruhr-Universität Bochum; Room GC 04/311; 44780 Bochum, Germany; Phone: ++49

234 32-28971; Fax: ++49 234 32-14247; E-mail: [email protected].

Werding: Children are costly, but raising them may pay: The economic approach to fertility

254 http://www.demographic-research.org

1. Introduction

Population trends and their economic consequences have long been studied by

economists, e.g. by Adam Smith (1776: ch. I.viii), Robert Malthus (1803), or John

Maynard Keynes (1937). However, attempts at systematically explaining these macro-

level trends through economic analyses – based, among other things, on a micro-

economic theory of parental fertility choices – are a much more recent phenomenon.

What is currently considered to be “the” economic theory of fertility can largely be

taken to be a strand of literature inaugurated through a seminal contribution by Becker

(1960). Over time, the research programme covered in this literature has grown

substantially, not only through a multitude of extensions and adaptations brought forth

by Becker and his followers (see, e.g., the contributions collected in Becker 1981,

1991), but also through the integration of alternative ideas developed by a number of

independent researchers and critics (probably the most important being Easterlin 1969;

Pollak 1985; Rosenzweig and Schultz 1985; or Cigno 1993).

Economists were thus rather late in entering the field of fertility research. Also,

when applying their analytical tools to this issue, they tended to ignore most of what

other social scientists had done in this area beforehand, potentially offering a first-rate

example of what is sometimes called “economic imperialism”. As Leibenstein

(1974: 458) put it,

“to some of those who had been laboring in the vineyards of demography

for decades, the efforts of economists in the sixties and seventies to develop

a theory of fertility must have appeared like the invasion of a horde of

primitives on a technologically advanced community proclaiming loudly

their intent to reinvent the wheel.”

Ironically, this objection was raised by one of the few economists who had been

working on fertility even earlier (cf. Leibenstein 1957). Leibenstein‟s substantive

criticisms were that the new economic theory of fertility was formally rather complex,

but at the same time far too rough regarding many details of real-world fertility

behaviour to be of any practical value for applied research on this issue, beyond the

mere replication of well-known results. Since those early days much of this has clearly

improved through more specific research questions, a stronger empirical orientation,

and access to better data. Still, Leibenstein may have a fundamental point about the

prominent role of modelling strategies, at the expense of empirical richness, which still

applies to economic analyses compared to fertility research in other disciplines.



Providing a full-scale survey of the history and current stance of economic fertility

theory would be clearly beyond the scope of this article.2 Rather, it is meant to

introduce researchers from other fields to basic features of this particular approach,

highlighting potential merits as well as weaknesses (Section 2); to point to

developments which appear to be particularly important for current research on fertility

done by economists (Section 3); and to make suggestions for an agenda for future

research which could become increasingly interdisciplinary in its nature (Section 4).

Section 5 concludes the article.

Before going into detail, it is important to note that the economic theory of fertility

does not provide a particular explanation for why people may want to have children.

Nor does it necessarily yield a consistent set of results when addressing important sub-

issues such as the desirable number, timing and spacing of births, that is, how many

children parents may wish to have, at what stage of their life cycles, at which intervals,

etc. Rather, economic theory provides a generic, but distinct approach to analysing

relevant motives and outcomes. It rests on a uniform paradigm with potentially

differing specifications which can be brought to bearing on various dimensions and

aspects of actual fertility behaviour.

2. The economists’ contribution to explaining fertility behaviour

At the core of contemporaneous, mainstream micro-economics is the idea that agents

are constantly making “rational” choices in order to maximize their well-being

(“utility”), as perceived by themselves, under the conditions (“constraints”) of scarce

resources, limited capacities, limited financial budgets, limited information and,

ultimately, limited time to relax any of these restrictions.3 While prices, production

technologies, and constraints may vary over time, economists are usually reluctant to

assume that individual preferences change. The main reason is that preferences are not

easily observable, so this assumption could be used for explaining anything that

happens (Stigler and Becker 1977). However, methodological strictness is one thing,

the realism of the assumption that relevant individual preferences are entirely stable is

another, as has been acknowledged in a number of relevant contributions (e.g.,

Easterlin, Pollak, and Wachter 1980; see also Pollak 1970).

2 See Hotz, Klerman, and Willis (1997) for an extensive survey of this kind; Robinson (1997) provides a less

technical discussion of achievements and shortcomings of the economic theory of fertility unfolded until then. 3 To most economists, the notion of “bounded” rationality (Simon 1978), which is seemingly more realistic, is

effectively a refinement of this idea, elaborating on way the limitations of information and capacities to obtain

and process these are being dealt with, not a deviation. It should be noted, though, that this view is probably based on a mainstream economist‟s reading (as summarized in Arrow 2004) more than on Simon‟s original

thinking.



The economic theory of fertility basically fits in with this description, giving rise

to the fundamental question of whether rational decision making is indeed a meaningful

approach to dealing with this specific issue (see Section 2.1). Provided that it is, this

generic framework can be interpreted and applied rather flexibly to obtain differing

types of models which are suited to address quite a number of specific research

questions – although mostly only one at a time (Section 2.2). There may thus be

limitations to this approach, especially in capturing the social and societal context of

fertility decisions, but in the light of current research these limitations are less tight than

one may think (Section 2.3).

2.1 Is there room for rational decision making?

As a generic logic of choice, economic theory is applicable to basically any issue

regarding which choice is technically possible and is not socially discouraged or legally

prohibited in a binding fashion. These conditions certainly apply to fertility where

modern contraceptives are used – although things may not have been entirely different

based on many older techniques of controlling fertility. The conditions could be

violated, for instance, within populations whose religious convictions lead them to have

as many children as biologically feasible or, at least, to stay fully uninformed about

fertility control. With an eye on the required freedom of choice, economic theory

should thus be clearly suited for addressing some relevant aspects of fertility behaviour

in developed countries.4

In principle, the various pros and cons or, in terms of economic concepts, the

“costs” and “benefits” determining rational decisions in all areas of human behaviour

could be defined very broadly. However, applying the economic approach to fertility

appears to be useful mainly because parental fertility decisions have a strong economic

dimension in a rather narrow sense. It is true that these decisions have a biological

background as well. They also have a strong affective dimension – love between

partners and towards children – that economics may not be fully suited to get a grip on,

and they are deeply embedded in a broader social context than economists are used to

deal with (see Section 2.3). But, at the same time, raising children is costly, i.e., it has a

strong impact on an average family‟s financial situation, so that the desire to do so

almost inevitably competes with many other needs and wants of potential parents. One

may thus not think that the economic approach explains everything about fertility,

4 This statement does not rule out that economic theory is also applicable to fertility choices in developing countries, although the context, hence interesting research questions, may slightly differ there. In fact, much

of the recent literature is based on applications of existing theories to data collected in the developing world.



especially with regard to the benefits involved. Yet, it would be highly implausible to

discard it as entirely inappropriate for analysing fertility behaviour.

With the fundamental assumption that fertility is, to a considerable degree, the

result of rational decision making, economists do not expect couples or individuals to

“compute” their optimal solutions, certainly not in the same way as these are formally

re-stated in economic models. With some sense of realism, how is rationality then

assumed to enter actual fertility decisions? Two answers to this question may be equally

important. First, when considering whether to have children – and if so, how many,

when, etc. – potential parents are restricted to picking solutions which are economically

feasible. So if nothing else, their budget constraints effectively force them to respond to

costs and limited resources in a way that looks rational, at least over a larger aggregate

of individuals.5 Second, rationality in a more substantive sense may be at work when,

among a broader set of options demonstrated by members of the preceding generation,

many young people tend to imitate those lifestyles that appear to be economically more

promising, i.e., to bring about a more favourable balance of costs and returns. While

this view relaxes the strong demands of rationality for many individuals, it does not

remove them with respect to a limited number of “pioneers” who find it worthwhile to

reconsider conventional behaviour more quickly than others when they feel that the

relevant costs, benefits, and constraints have changed substantially. Fertility choices are

clearly a bit special in this respect because of the enormously long time horizon and the

numerous uncertainties involved in raising children. Given that, the behavioural

changes in this area, which can be explained as rational responses to on-going changes

in the environment, have in fact been tremendously rapid in recent decades – much

faster, in fact, than could have been brought about by imitation and passive adaptations

alone.

While this conjecture may be open to debate, rational-choice models also have an

important advantage from a methodological point of view. As they are based on a clear-

cut decision rule, they lead to theoretical predictions which can be tested empirically –

and can be rejected if they are misguided. With many alternative approaches, this is

impossible as long as the sources of limitations of rationality or the decision rules that

are assumed to be at work are not stated precisely.

5 See Becker (1962a) for a demonstration that the aggregate-level response to increases in the price of a good

corresponds to economists‟ predictions, even though the reactions of individuals may in fact be either

stochastic or governed by strong habits. This is ensured through the law of large numbers and through the fact that, with individual demand tending to move in either direction or remaining constant as long as this is

feasible, budget constraints sometimes become binding and sometimes not.



2.2 Modelling options for analyzing fertility choices

Another strength of the economic theory of fertility is that, building on a common

paradigm, it offers many options for designing different types of models. The types of

models which are conventionally employed in this area are mainly distinguished by

assumptions regarding who is effectively making fertility choices, how these agents are

motivated, and how they are thought to be influenced by their environment or by other

agents‟ decisions. As a result, various elements from the economist‟s toolbox can be

combined rather flexibly to form models which are not just simplified according to the

modellers‟ convenience, but specifically suited for addressing a multitude of particular

research questions.

First of all, the subject of fertility choices can be taken to be a couple

(“household”) of potential parents who are acting jointly as a decision making unit or,

alternatively, the (two) individuals who typically interact in producing and raising a

child. In the former case which dates back to Becker (1960), the internal structure of the

household and any potential conflicts between its members are largely neglected,

assuming that there is a common interest in having, or not having, children, subject to a

common set of constraints. Models of this kind are still in use as they are easier to

handle; they are useful if the interest lies mainly with external determinants of fertility

that affect household members, i.e. potential parents, in much the same way. In the

latter case, the differing roles of partners become visible and the possibility of an intra-

household division of labour arises. While it can still be assumed that the individuals

involved follow pre-defined decision rules to avoid analytical complications, more

complex models, such as those first suggested by Pollak (1985), reflect that potential

parents may have different objectives and are faced with differing constraints, implying

that their fertility choices are the outcome of a bargaining process with several stages –

forming a couple, having children, allocating childcare responsibilities, staying together

as a family, etc. – which can again be subjected to economic analysis (see Section 3.1

for further details).

Second, children as the object of fertility choices can be classified in economic

categories in different ways, each implying different motives (“incentives”) to have

them and bring them up. In a stylized view,6 children can be seen (a) as sheer by-

products of other desirable activities, mainly sex, which is clearly a limiting case of a

model of active fertility “choices”; (b) as consumption goods which, not unlike the

consumption of many other goods, directly increase the utility of parents (as in Becker

1960); (c) as investment goods which increase parental utility indirectly, viz. by

increasing their parents‟ life-time income or life-time consumption of other goods (as in

6 See Schultz (1973) or Cochrane (1975) for discussions of the first three categories children can be put in; the

fourth one is explicitly acknowledged in Werding (1998: Section 2.1).



Cigno 1993). Another aspect which sets children apart from all economic categories of

“products” or “goods” is that they are (d) new individuals themselves. This latter aspect

renders all kinds of normative analyses in the context of fertility conceptually very

difficult.7 Nevertheless, the desire to see how one‟s children respond to parental actions

and eventually grow up to making their own choices on various issues may be a strong,

and genuine, fertility motive. Some of this is probably reflected in “altruistic” fertility

models where parents‟ utility increases in line with the utility of their children (as in

Becker and Barro 1988). In many respects, however, altruistic models of fertility

choices behave much like consumption-goods models, so that (b) and (c) – or,

alternatively, (c) and (d) – are the two major cases one may have to distinguish.

Combining these “pure” fertility motives in mixed models is, of course, possible; but it

can become analytically difficult and, in any case, confuses the different mechanisms at

work.

In another dimension, children can be treated as being purely private goods, for the

purposes of consumption or investment of their parents, or for their own well-being that

parents may be interested in. Alternatively, it can be acknowledged that they tend to

have considerable externalities, i.e., effects for the well-being of other members of

society. Folbre‟s (1994) description of children as “public goods” exaggerates this

point,8 but there are clearly various channels – for instance, preservation of a cultural

heritage, contributions to future technological progress, or “fiscal externalities” arising

in tax systems and public pension schemes – through which decisions on having

children affect a wider public. This, in turn, could justify some amount of public

intervention in this area, for instance, through instruments of family policies.

Whatever the motives for, and the returns to, having children, doing so also

involves certain costs by which fertility choices interfere with other economic decisions

due to the different types of constraints mentioned above. When compared to the costs

of other goods and activities, child costs are particular in several ways that economic

theory is fully prepared to deal with. For instance, when raising children, parents are not

only faced with monetary expenses on each of their children‟s cost of living (food,

clothing, body care and health, extra costs of housing and household appliances,

education, etc.). Often, the main types of costs arising are “opportunity costs” of

income foregone through the time spent on childcare activities (or, alternatively,

expenditure on child care provided by other persons or in appropriate institutions).

7 The difficulties show up in questions like these: How to assess an “optimum” population size, accounting or

not accounting for the interests of “potential” individuals? How to assess the distributional and incentive effects of public support for poor people who have more children than they can “afford”? 8 As long as children do have “internal” effects for parents or themselves that are relevant as fertility motives,

they are by definition not (purely) public goods. However, children are public goods (or actually “club goods”) for the two parents involved in raising them – a feature that becomes important when their potentially

diverging interests are taken into account (again, see Section 3.1 as well as 3.2).



Another peculiarity is that parents are able to determine the “price” of their children

themselves to a considerable degree, simply by spending more or less on each child

(this is the “quality” aspect of fertility choices first suggested by Becker 1960).

Furthermore, the timing of all these costs is unusual in that they do not require a

substantial down-payment when a child is born. Rather, they accrue in portions over a

very long period of time, nevertheless amounting to enormous bills on present value

terms. A feature which also matters in this context is that children are, to a large extent,

an “experience good”, meaning that actual costs – as well as actual returns to having

them – are fully revealed only once they are there. The impact of all these peculiarities

on fertility choices may differ, e.g., depending on the relative preferences of parents for

quality over quantity of children, or resulting in what looks like an underestimation of

costs for “myopic” parents and an overestimation of costs for parents with a strong risk-

aversion.

Against this background, constructing meaningful fertility models is an art, or

rather a craftsmanship, which rests on choosing between these basic elements,

highlighting one aspect or another that is thought to be particularly relevant, and

abstracting from features that appear to be less important for the specific research

interests pursued. The resulting models can then be represented using mathematical

methods, they are usually analysed formally, and the results can be subjected to

empirical testing. This leads to a final observation about the role of economic theory for

research on fertility. Economics is essentially a quantitative discipline, interested in

exploring not only the direction, but also the size, of effects for tangible outcome

measures it can attribute to those determinants that economists are able to identify. In

the context of fertility research, this may well be an advantage and a weakness at the

same time, leading to a clear focus, but implying a narrow perspective, on specific

aspects of this issue.

2.3 How much of the social context can enter the analysis?

While stressing the element of choice involved in fertility behaviour, taking into

account its social context is clearly not one of the strengths of the economic theory of

fertility. The early contributions by Leibenstein (1957) and Easterlin (1969; see also

Easterlin, Pollak, and Wachter 1980), who both include ideas borrowed from

sociologists and demographers in their (non-standard) formal models, are now almost

forgotten, at least in the discipline of economics. Up to a point, these ideas have been

taken up once again in recent empirical work when controls for the social status of

individuals and for related consumption aspirations are taken into account as

background variables which may matter for decisions regarding fertility. Yet, their



basic idea that preferences for having children are actually shaped by social influences

and economic conditions during youth and early adulthood are no longer actively

pursued.

There are several ways of arguing that some of the social context is implicit even

in the most basic economic models. Decision units in these models are sometimes

called “representative agents”, which could be taken to reflect the existence (and

importance) of social customs and norms effectively limiting the choice set much like

other constraints. There is now also a broad strand of literature on “institutional

economics”, explaining all kinds of formal or informal rules through the resulting

reductions in transaction costs which would be involved in unguided interactions

between rational individuals (for an early application to the institution of the family, see

Ben-Porath 1980). But unless specific aspects of the social context of fertility behaviour

are explicitly included in the set-up of a particular model, taking these into account is

certainly not an integral element of the economic approach. Rather, economists

conventionally discuss some of the context as an aside, for instance, to motivate a piece

of applied research or to interpret their findings.

Given these limitations, at least three societal sub-systems are often explicitly

addressed in economic analyses of fertility, though rarely all at the same time. First, a

number of studies pay specific attention to how potential partners interact in the context

of making fertility decisions – addressing, among other things, the formation of

partnerships, marriage and divorce, the governance structure for “joint” decision

making or for how partners bargain with each other (see Section 3.1 for further details).

Second, a major issue in current economic research on fertility is how choices in

this area interact with decisions regarding labour force participation and how they

respond to labour market performance, to decisions taken by firms, and to labour

market institutions. Specific questions addressed in these fields relate to participating in

paid work at all, the timing of entry or withdrawing temporarily and/or partially (viz. in

terms of hours worked), firms‟ hiring behaviour, as well as the effects of employment

protection and other labour market regulation specifically targeted at parents (see

Section 3.2).

Labour market institutions also form part of a third issue addressed in current

research where aspects of the social context are explicitly taken into account,

investigating how parental fertility choices are influenced by various instruments of

public policy, for instance, through the general design of taxes and social protection

schemes, through tax rules or benefits specifically geared towards families and children,

or through public provision or subsidization of child care, etc. (see Sections 3.2 and

3.3).9

9 It is of course a distinct question whether public policy should engage in actively influencing parental

fertility decisions – or whether its influence, provided there is one, should not be removed (as a “first-best”



3. Milestones and recent developments

It was already mentioned that, in its early days, the economic theory of fertility has

been absorbed, to some extent, by fully developing and understanding its analytical

tools. Some of the models suggested, while formally challenging, were of little use for

applied research or for a fruitful dialogue with researchers from other disciplines.10

Even though economic research on fertility may have had to go through this stage, the

main advances since then have been marked by the formation of several types of fully-

fledged models incorporating some amount of the social context and the institutional

background of actual fertility choices in a tractable fashion, and by subsequent moves in

the direction of empirical research.

In this sense, three developments appear to be particularly important for current

and future fertility research conducted by economists: investigations into the internal

structure of parental couples and their decision making (see Section 3.1); analyses

reflecting the interdependence of fertility choices and labour supply decisions of both

parents (Section 3.2); and analyses exploring the potential benefits of having children in

a life-cycle perspective, that is, focusing on children as an “investment good”

(Section 3.3).

3.1 Fertility and intra-family bargaining

In economic models of fertility suggested in the initial phase of this research, the

parental household was taken to be the relevant decision making unit. The

simplification involved in this “unitary” model of a given couple‟s interactions and

choices was not only due to technical reasons. Emphasis at that time was placed on

discussing (common) motives of parents to have children and investigating how their

(joint) decisions – for instance, regarding an optimal number of children – would react

to changes in income and child costs. Later on, opening the “black box” of the

household as a collective agent and looking at intra-household relationships, as is done

solution) or reduced to a minimum (to approach a “second-best” scenario, at least). The economic theory of

fertility provides a number of caveats, but it also establishes a few reasons why public intervention in this area

might be justified (see Werding 2010). 10 An interesting example is offered by the in-depth analysis of the quantity-quality interaction involved in

parental fertility decisions by Becker and Lewis (1973). In their model, intriguing problems regarding the existence of an “interior” solution move to the fore. The way in which they set out, and solve, these problems

is a brilliant piece of theoretical analysis, but it is empirically empty as a key parameter of their approach, viz.

the price per “quality unit” of a child, is unobservable. In current research, the negative impact of income and wage earnings that could arise in this model is usually attributed to increasing “opportunity costs” of child

rearing which are likely to be much more important in explaining the fertility decline in developed countries.



in Easterlin, Pollak, and Wachter (1980) or Rosenzweig and Schultz (1985), marks a

major extension of economic analyses applied to this field.

As an intermediate step, fertility models started to distinguish between two parents

with differing roles and a specific division of labour. As long as these roles are

effectively assumed to follow a pre-defined structure, the models become empirically

richer but still leave out a considerable amount of potential internal conflicts that may

matter for fertility decisions in reality. Yet, as more complex models are analytically

demanding and difficult to handle in an empirical context, the assumptions of fixed role

assignments and pre-defined decision rules for parental couples are still a common

standard in most of current research. In an empirical context, for instance, fertility

choices are often considered as if they were effectively made only by women (the

existence and characteristics of a partner being only included among a number of

background variables). The design of these models reflects that women are typically

acting as second earners who take care of children much more than do their husbands or

partners. Behaviour conforming to this conventional role model is indeed still rather

wide-spread, so that these models are not necessarily far away from reality.

Nevertheless, life styles of couples are becoming more and more heterogeneous,

and partnerships and marriages are increasingly unstable. This calls for new types of

models explicitly dealing with the formation and potential break-up of parental

relationships which constitute a major difficulty for decisions to raise children as an

intra-family public good. Bargaining models in which the two partners may

strategically interact with each other to define their positions and their individual and

collective room for manœuvre are thus another remarkable progress. Building on Pollak

(1985), Ott (1992) was effectively the first to fully spell out the implications of a

bargaining approach for fertility choices in a theoretical fashion.11

With some delay, her

research has sparked off a number of empirical contributions, the most recent being

Iyigun and Walsh (2007), Brodmann, Esping-Andersen, and Güell (2007), and Rasul

(2008).

The bottom line in this research is that the optimal number of children tends to be

smaller if models are based on bargaining between two partners, rather than on the

“unitary model” or on simple decision rules applied within the parental household. The

reason is that these latter types of models neglect the costs of weakening the bargaining

position of one partner through an asymmetric division of labour regarding the options

of engaging in paid work or in child care and other intra-household activities. Resulting

inefficiencies become even more apparent when linkages between fertility choices and

11 While the approach by Ott (1992) combines elements of cooperative and non-cooperative bargaining, there

are also models in which partners are assumed to interact entirely non-cooperatively, but explicit applications to fertility choices are limited (see Konrad and Lommerud 1995 for an exception; Chiappori and Donni 2009

for a broader survey).



parental labour force participation (and education) are taken into account as well (see

Section 3.2). Existing analyses also indicate that partners are often unable to commit to

co-operative solutions which could restore the balance of bargaining power to some

extent. Uncertainties involved in the bargaining procedure may thus have rather strong

effects.

3.2 Fertility and labour force participation

Another area where economic fertility research has made substantial progress is that of

in-depth analyses of interactions between fertility choices and labour force participation

of parents, especially mothers. Willis (1973) was effectively the first to explicitly

incorporate (maternal) labour supply decisions and their impact on fertility choices in

the simple theoretical models dominating the literature at an early stage. In this type of

models, female wages tend to become a key parameter for the determination of fertility

outcomes (see, e.g., Ermisch 1979, 1990). At closer scrutiny, however, they cannot be

taken to be an exogenous determinant of fertility, as they depend on women‟s

qualifications and are thus the result of more fundamental choices (Rosenzweig and

Schultz 1985).

Decisions regarding the number of children or the timing and spacing of births are

therefore part of a larger picture in which potential parents are operating under a basic

time constraint which gives rise to conflicts with a number of other core activities in

life-cycle planning that are likely to have a strong impact on life-time financial budgets.

Education, labour force participation in general, or the pursuit of occupation-specific

career patterns are probably the most important examples for these competing activities,

with long-lasting effects in any of these areas if individuals have, or do not have,

children. Models suited to deal with this should have a longitudinal dimension, ideally

spanning the entire life cycle of the individuals considered (as in Mofitt 1984; Hotz and

Miller 1988). They should reflect the sequential nature of actual fertility decisions, that

is, consider them as decisions to have (yet) a(-nother) child (e.g., building on Wolpin

1984), rather than taking observed fertility outcomes to be the result of a one-shot

optimization. Last but not least, they should capture all types of opportunity costs that

may influence fertility decisions (see Joshi 1998; Waldfogel 1998), so that they include

not only those earnings forgone while taking care of a child, but also lasting effects for

wage rates and the career prospects offered to job applicants or employees (including

the possibility of a differentiation or discrimination by their gender).

Within this larger picture, due to data limitations and resulting identification

problems, empirical research often concentrates on single aspects or on particular sub-

periods, such as interactions between fertility choices and qualifications, or between



fertility and time patterns of labour force participation of young women. Early

empirical work exploring the enormous heterogeneity of individuals and career patterns

offered in specific firms and occupations (see, e.g., Cigno and Ermisch 1989; Eckstein

and Wolpin 1989) has since been replicated and extended again and again, using richer

data for an increasing number of countries. Attention has been given to the role of the

macroeconomic environment, particularly fluctuations and trends in unemployment

(Butz and Ward 1979; Adsera 2005; Del Bono, Weber, and Winter-Ebmer 2012). More

recently, empirical research has shifted its focus towards investigating the impact of

institutional factors, such as public regulation regarding parental leaves, benefits meant

to replace wage earnings during periods of pregnancy and subsequent leaves of

absence, or the public provision of child-care institutions (see, e.g., Kögel 2004;

Björklund 2006; Lalive and Zweimüller 2009; Del Boca and Sauer 2009; or Bergemann

and Riphahn 2009). Up to a point, researchers are now effectively evaluating the active

role that the state is increasingly taking in this area.

3.3 Children as investment goods

The life-cycle dimension of fertility decisions is important also for a further aspect that

has moved to the fore in the economic theory of fertility over time and is rather

prominent in current research. Leibenstein (1957: 161–163) had already suggested that

raising children may not only be desirable because of a consumption motive of potential

parents. Through future contributions of children to the lifetime income of their parents,

he argued, there could also be a strong investment motive for fertility.

This idea was largely forgotten in the work conducted by Becker (1960) and most

of his followers. Of course, Becker‟s notion of child quality (as perceived and

demanded by the parents) can effectively be taken to represent a large variety of

parental “investments” in children (such as monetary expenditure on food, clothing,

health, etc. to provide for a higher living standard of each child, but also time spent with

children, e.g., to support them in obtaining a better education). Therefore, the notion

may also have considerable overlaps with the concept of “human capital” (as a

determinant of the life-time income of children) which is embodied in a given child.12

But as long as the motivation of parents to expend resources on any of these items is

assumed to be an increase in their own utility, the value of having a child has an

arbitrary element, and virtually any changes in observed fertility behaviour could be

attributed to changes in this consumption value. Changes in how parents might benefit

from bringing up children in a much more tangible fashion, through financial transfers

12 Remember that Becker (1962b) himself contributed substantially to the literature on “human capital” in a

distinct branch of his writing. But he never discussed the conceptual links to his ideas on fertility.



or personal services accruing at a later stage in their lives, are entirely neglected in pure

consumption models of fertility.

More recent research has highlighted that, during the process of modernization,

there have indeed been major changes in how subsequent generations typically interact

with each other. As a consequence, the investment motive for raising children may have

become much less important for potential parents than it has been in the past, certainly

in more developed countries. However, this does not mean that theoretical models

focusing on children as a potential source of parental lifetime income or well-being

have become immaterial over time. On the contrary, they might actually contribute

substantially to explaining long-term trends and ongoing changes in fertility behaviour.

Basically, this is the main idea behind the research triggered by Cigno (1993).

Where child labour with early contributions of children to household income of their

families is no longer an issue, raising children in order to receive financial support and

care from them at old age could still be an important incentive to raising children.

Having children is a genuine investment then, and any effort of parents to increase their

children‟s living standard, health or education may add to the expected returns. In fact,

all of these efforts are not only likely to increase the capacities of children to support

their parents later on, but they may also increase their willingness to do so – hence, the

probability that parents can actually rely on them at old age – within a system of mutual

exchange between subsequent generations.13

Given that, the expansion of capital markets and the advent of public provision for

old age may have interfered with parental fertility choices, essentially reducing the

number of children and/or expenditure on children (a point further investigated by

Werding 1998 and fully explored in Cigno and Werding 2007; related empirical work

has been provided, e.g., by Cigno and Rosati 1996; Cigno, Casolaro, and Rosati 2003;

or Ehrlich and Kim 2007). These effects could be mitigated or, alternatively, even

reinforced through various types of uncertainty which also play a role for the long-term

relationship between parents and children (Cigno, Luporini, and Pettini 2004; Cremer,

Gahvari, and Pestieau 2006) and are still in the process of being investigated more

closely in this strand of research. Note, however, that the returns to investment in

children accruing at old age may not only take the form of monetary transfers, but also

of personal care and attention, for which neither the state nor markets are able to offer

perfect substitutes. Investment in children may therefore have changed considerably in

both level and structure. Yet, it can still be relevant as a parental fertility motive.

13 Cigno (2006) speaks of an informal “family constitution” prescribing the terms of this exchange and shows

that it can be self-enforcing and renegotiation-proof under certain conditions. Still, such a system is fragile in that young people may have incentives to default on it – that is, terminate it – if the economic or institutional

environment changes.



4. Agenda for future research

To some extent, directions for future research on fertility that appear to be promising

from an economist‟s point of view follow directly from the extensions and refinements

which have been discussed in the previous section. Most likely, some of the progress

which can be expected is thus already under way.

First of all, combining the different aspects mentioned before in a unified research

agenda may be worth some effort. For instance, interactions between fertility,

educational attainments, and labour supply in individual decision making are effectively

an important complication of the bargaining processes between two partners who could

possibly have children together. Dealing with this in its full complexity, i.e., as a

dynamic multi-stage process which is not restricted by any conventional role

assignments, has so far been beyond the scope of theoretical and empirical research.

Similarly, analysing children as an investment good with differentiated inputs by the

(two) parents, with an eye on mechanisms making sure that the corresponding returns

really do accrue to each parent is a field of research which has not been entered yet.

There are, of course, limitations to the degree of complexity which can and should be

accomplished in economic fertility models. Not everything that appears to be

theoretically challenging can be made formally tractable, nor can it be taken to applied,

empirical research in a meaningful way. Still, theory may need some leeway for

exploring these potential limitations.

What is currently still underdeveloped in terms of promising empirical work is

research fully taking care of the time and life-cycle dimensions of actual fertility

decisions. For instance, tracking individuals on their pathways into forming a couple,

becoming a parent, and combining this with individual activities of both partners in the

areas of education, labour force participation, and professional careers is clearly

worthwhile. Ideally, research of this kind should actively address the timing and

sequencing of any of the events it is looking at, including all the uncertainties, instances

of incomplete information, and path dependencies involved. An interesting observation

for this type of research is that timing and spacing decisions should be expected to

interact to some extent, and that the time dimension may feed back on fertility

outcomes in terms of total numbers of children.14

For instance, longer education tends to lead to a postponement of first births. If this

does not (fully) translate into a reduction in the total number of children, the births must

be concentrated in a shorter time span. There are further, competing trends which may

influence these spacing decisions. An important source of costs associated with children

14 Among other things, this makes it difficult to disentangle on-going changes in desired total numbers of children from changes in the average timing and spacing of births, a feature potentially obscuring many

attempts at assessing the determinants of long-term trends in fertility behaviour in an applied context.



is time spent taking care of them, while care-taking can relate to more than one child at

a time. There should thus be large “economies of scale” involved in a narrow spacing of

births. At the same time, the lasting effects of parental leaves on future earnings could

be an increasing function of the length of time spent out of work. Therefore, parents

planning to have more than one child may wish to keep their parental leaves rather

short, with intermittent periods for which they return to their jobs. Furthermore, as the

decision to have a child is basically irreversible, the various uncertainties involved

imply that there may be an “option value” of postponing births, sometimes even until it

is too late. The advantage of this strategy is that unfavourable surprises on the cost side

can be avoided, while expected benefits of having a child could still be reaped later on.

As a result, the perceived value of waiting can become a quasi-determinant of the final

number of children. This simple idea is implicit in some analyses of the optimal timing

of births, but it appears that, thus far, it has not been studied explicitly.

Another issue that may deserve closer attention in future research involves the

many dimensions of heterogeneity with respect to lifestyles encompassing bringing up

children or not. Specific questions might be how marriage or cohabitation relate to

fertility choices in different societies and under different economic conditions; how

being a mother (or a father) may remain important for changing gender roles, even

outside traditional heterosexual partnerships, resulting in lone parenthood (sometimes

from multiple partners) or in homosexual couples with children; what, to the contrary,

drives a growing portion of people to remain childless and how this influences their

self-perceptions and activities at different stages of their life cycles; how fertility

choices vary by income levels or over ethnic groups, or why migrant communities show

signs of assimilation or no assimilation in this area. A promising point of departure for

this kind of research which may become increasingly interdisciplinary is probably

provided by the new concept of “identity economics” suggested by Akerlof and

Kranton (2010). In Chapter 2 of their book, the authors include a few remarks regarding

the desire for children, but there is ample room for developing this into a differentiated

research programme.

At a more aggregate level, there has thus far been no theory, and probably never

will be, which is generally accepted and provides a comprehensive explanation for the

long-term fertility decline observed throughout the developed world. What comes

closest to this standard is the theory of “demographic transition”, a purely descriptive

approach which highlights a characteristic sequence of reductions in (age-specific)

mortality and fertility, with consequences for the size and the age structure of the

populations affected that are easily predictable. Meanwhile, demographers tend to

assume that even many developing countries have started to follow these basic trends,

although with some delay. While this might be good news in a global perspective,

common challenges for all researchers who are interested in demographic phenomena



are to provide more insights into all mechanisms that are at work in this transition and

to add to the understanding of lowest-low fertility, its conditions and its consequences,

which is nowadays observed in some developed countries and regions.

Thus far, economists have been reluctant to use qualitative data, and they are

certainly not qualified to apply qualitative empirical methods. However, there is now a

new brand of “happiness research” being done by economists (see, e.g., Frey and

Stutzer 2001; or Layard 2005) which may increasingly move this borderline. There, the

degree of life satisfaction as indicated by respondents in representative surveys is taken

to be a reliable indicator of individual well-being – and it is being investigated more

and more intensely regarding its determinants in various areas of human life and human

behaviour. In a sense, the older, more abstract notion of “utility” may thus have become

measurable, allowing for fundamental changes in the design of research projects

pursued in the discipline of economics. It is too early to assess whether research of this

kind may also be a good example for potentially fruitful co-operations between

economists and other social scientists who are specifically interested in fertility. For the

moment, research focussing on “happiness and fertility” still appears to be a domain of

demographers and sociologists (see, e.g., Billari and Kohler 2009; or Margolis and

Myrskylä 2010).

Last but not least, future research of an interdisciplinary nature could certainly

benefit from improvements in the data infrastructure. From the point of view of

researchers, an ideal data base should be longitudinal, assembling detailed quantitative

as well as some qualitative information for representative samples of individuals and

households, organized in several “layers”, that is, it should encompass complete

histories of household formation, education and labour force participation; contain data

on various kinds of interactions with children, including information regarding child

outcomes (most importantly health and skills); and include data on a broad array of

public interventions that may matter for any of these aspects. In addition, the ideal data

base should build on parallel surveys conducted in different countries to allow for

comparative work at an international level. Again, some of what is described here is

already under way, while one might also have to acknowledge that an ideal data base of

this kind may well turn out to be prohibitively costly.

5. Concluding remarks

Some of the issues brought up here for future research on fertility (see Section 4) are

already being addressed in an initial fashion by several disciplines, but methods and

observations are diverse, and investigating the role of economic aspects is not a primary

concern. In fact, one major ambition of this article is to make a plea for including



economic aspects and models in any large-scale attempt at understanding fertility

behaviour under contemporaneous conditions. Economists can make a substantial

contribution to research on fertility, in spite of the limitations of their approach that

have been mentioned here.

Current empirical work on fertility shows considerable convergence across

disciplines. Up to a point it is mainly the disciplinary backgrounds of researchers, and

the journals in which they publish their results, which mark a difference. If there is

anything distinct about the work done by economists in this field, it is probably that

their empirical models are more theory-based in their structure, hence less eclectic in

the choice of variables, and that they are more interested in reliable identification

strategies and in causal explanations than others. Against this background, joint

research on fertility appears to be called for which is genuinely interdisciplinary, based

on complementarities between the differing approaches and methods applied.

6. Acknowledgments

I am indebted to two anonymous referees whose suggestions proved very helpful in

determining the final scope of this review. Also, I would like to thank the participants at

the conference on “Theoretical Foundations for the Analysis of Fertility”, held at the

University of Lausanne in October 2010, for stimulating questions and comments

regarding the contribution of economists to this field of research.



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http://dx.doi.org/10.1086/260152

http://dx.doi.org/10.1086/261262

Children are costly, but raising them may pay: The ... · PDF fileChildren are costly, but...

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